22 June 2012

Mozambique: Euro Zone Crisis Threatens Mozambican Economy

London — The London based Overseas Development Institute (ODI) on Thursday warned that economies in Africa face a decline in investment, trade and aid as a result of the economic crisis in the euro zone.

According an analysis by the ODI, the developing world faces a loss in output of 238 billion US dollars during 2012 and 2013 because of the deepening crisis in the euro area. It calculates that this will cause a drop of half a per cent in the growth in poor developing countries, with Mozambique one of the most at risk nations.

The report's author Dr Isabella Massa explained that "there are three broad ways in which the euro zone crisis will affect developing countries - through financial contagion, as a knock-on effect of fiscal consolidation in Europe to meet austerity needs, and through a drop in the value of currencies pegged to the euro".

The report found that "Mozambique is among the most vulnerable countries owing to its high dependence on euro zone trade flows and cross-border bank lending from European banks. It is also highly dependent on aid and has a significant fiscal deficit which has worsened since the global financial crisis".

The ODI expects EU aid to Mozambique to be largely static, and that "any future change in aid volume or modalities is more likely to be the result of ongoing policy re-orientations among donors or their concerns on governance and the implementation of the poverty reduction plan than a direct impact of the sovereign debt and banking crisis".

However, the ODI also states that Portugal has reduced its economic ties with Mozambique, which includes public investments.

On the other hand, the report states that Mozambique has achieved solid growth rates based on rising mining output and strong global demand for minerals, including aluminium. It expects the country's bilateral exchange rate with the South African rand to be stable.

The report highlights the fact that Mozambique is highly dependent on the European Union for trade, with 62.4 per cent of exports going to the euro zone in 2010.

Out of the forty countries covered in the report, Mozambique has the second highest vulnerability in terms of exports to the euro zone as a percentage of Gross Domestic Product - which in 2010 stood at over fourteen per cent (only Cote d'Ivoire had a higher percentage).

The report also warns that Mozambique might find that its banking sector is hit by problems in Portugal.

Mozambique's two largest banks, which account for sixty per cent of the banking sector's assets, are owned by the three major Portuguese financial institutions that experienced funding pressures through their exposure to European sovereign risks.

The report states that "even though it appears that Mozambican banks have generally remained resilient to the crisis, there is evidence that because of tight liquidity conditions and funding pressures from parent banks, they were forced to reduce their risk taking and curtailed credit growth".

According to Dr Isabella Massa, "the escalation of the euro crisis and the fact that growth rates in emerging BRIC economies (Brazil, Russia, India and China), which have been the engine of the global recovery after the 2008-9 financial crisis, are now slowing down make the current situation really worrying for developing countries".

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